Chapter 3: Elasticities of Demand & Supply
3-1. Elasticity is the ratio of the proportional change in one variable
with respect to proportional change in another variable. Price
elasticity, for example, is the sensitivity of quantity demanded or
supplied to changes in prices. Elasticity is usually expressed as a
negative number but shown as a positive percentage value.
3-2. The price elasticity of demand (PED) is an elasticity that
measures the nature and degree of the relationship between changes
in quantity demanded of a good and changes in its price.
3-3. How can we measure the price elasticity of demand?
E d  Q / Q1  P / P1
 Q / Q1  P1 / P
 Example: find price elasticity of demand when the price of
papers 10$ for band, the quantity demanded are 100 bands,
but when the price increase to 12$ for band, the quantity
demanded decrease to 60 bands?
Solution:
3-4. The kinds of elasticity of demand: there are five kinds of
elasticity of demand as follows:
3-4.1. high elasticity: the small change in price give the big change in
quantity demanded.
p
D
Q
p  Q
3-4.2.
low elasticity: the big change in price give the small change in
quantity demanded.
p
D
Q
P  Q
3-4.3.
Unity elasticity: the change in price give the same change in
quantity demanded.
P
D
Q
P  Q
3-4.4.
Non elasticity: when the change in price doesn’t give any
change in quantity demanded.
D
P
Q
E0
3-4.5.
Infinity elasticity: the small change in price will lead to replace
this piece of good to another.
P
D
Q
E
3-5. Price elasticity of supply: is defined as a numerical measure of
the responsiveness of the quantity supplied of product(A) to a
change in price of product (A) alone.
3-6. income elasticity of demand: measures the responsiveness of the
quantity demanded of a good to the change in the income of the
people demanding the good. It is calculated as the ratio of the
percent change in quantity demanded to the percent change in
income.
3-7. How can we measure income elasticity of demand:
E y  Q / Q1  Y / Y1
 Q / Q1  Y1 / Y
For example, if, in response to a 10% increase in income, the
quantity of a good demanded increased by 20%, the income
elasticity of demand would be 20%/10% = 2.
3-8: Cross elasticity of demand and cross price elasticity of demand
measures the responsiveness of the quantity demand of a good to a
change in the price of another good.
It is measured as the percentage change in quantity demanded for
the first good that occurs in response to a percentage change in price
of the second good.